A preference foundation for constant loss aversion
AbstractFollowing prospect theory we consider decision making under risk in which the decision maker''s preferences depend on a reference outcome. An outcome below this reference outcome is regarded as resulting from a loss: a loss decreases the decision maker''s basic utility more than a comparable gain increases this utility. An elegant and simple method to model this phenomenon was proposed by Shalev (2002): the utility of an outcome below the reference outcome is obtained from the basic utility by subtracting a multiple of the loss in basic utility: this multiple, the loss aversion coefficient, is constant across different reference outcomes. We provide a preference foundation for this loss aversion model.
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Bibliographic InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 062.
Date of creation: 2010
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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-EVO-2011-01-03 (Evolutionary Economics)
- NEP-UPT-2011-01-03 (Utility Models & Prospect Theory)
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